Oxford Business Law Blog bloghttps://www.law.ox.ac.uk/business-law-blog/blog
enListening to Users’ Expectations of Dispute Resolution Procedures: C2B Disputes and ADRhttps://www.law.ox.ac.uk/business-law-blog/blog/2018/11/listening-users-expectations-dispute-resolution-procedures-c2b
My recent book Ombudsmen and ADR: a comparative study of informal justice in Europe (Palgrave Macmillan 2018) is about how ordinary people experience part of the informal justice system. My focus is on ombudsmen as providers of alternative dispute resolution (ADR). ADR has been promoted throughout the EU as a fast, accessible, and cheap means to access justiceMon, 19 Nov 2018 11:00:00 +0000Naomi Creutzfeldt19998 at https://www.law.ox.ac.ukMy recent book Ombudsmen and ADR: a comparative study of informal justice in Europe (Palgrave Macmillan 2018) is about how ordinary people experience part of the informal justice system. My focus is on ombudsmen as providers of alternative dispute resolution (ADR). ADR has been promoted throughout the EU as a fast, accessible, and cheap means to access justice for consumer to business (c2b) disputes. EU legislation on consumer ADR (2013/11/EU) and online dispute resolution (ODR) (524/2013) has been implemented to strengthen and protect consumers purchasing in the European internal market.

My book explores the consciousness of consumers around alternatives to formal legality, as legality constructs ideas about justice in our everyday lives. While the laws on ADR/ODR were being implemented into national legislation I was keen to explore what users of ombudsman bodies expect from an ADR procedure. Looking at this fairly new institution I explored what makes users trust ADR and what legitimizes it and how they make sense of it. Based on an original empirical dataset of just under 2,300 recent users of ombudsman bodies in the UK and Germany I tested theories of procedural justice and legal consciousness.

I studied fairness perceptions through quantitatively exploring procedural justice. I measured and analysed people’s perceptions of an ombudsman process through surveys. Additionally, qualitative considerations (interviews and focus groups) uncovered different (cultural) approaches and fairness perceptions of ADR. My data suggests that the way people view ombudsman bodies is informed by their assumptions about legality. These assumptions are formed by our legal socialization. Put differently, how people construct legal attitudes influences their expectations of a system providing redress—spilling over into the informal dispute resolution space. In this context, I explored legal consciousness as means to uncover cultural specificities of disputing behaviour.

In the book, I asked how everyday assumptions about law and perceptions of fairness guide our expectations of informal justice, and argued that the relationships people have with the informal justice system are shaped by their experiences and preconceptions about how the (formal) legal system and its agents behave and fulfil that role. As a result, expectations of providers of informal justice are prone to being unrealistic.

In both the UK and Germany, I found that users care about procedural justice. However, there are national distinctions. These distinctions, I argue, have a cultural make-up. When asking users (the same range of questions) about their expectations of an ombudsman process, a UK user typically cares more about being heard and getting an apology in the process, whereas German users reported that getting their money back and getting what is legally theirs as most important factors in the complaints procedure. Informed by the empirical dataset, I conclude that a German user of ADR, used to a well-functioning and efficient court system, will have similar expectations of the ADR bodies. This is reinforced by the institutional set-up of most ombudsmen being a retired judge and their case handling staff being trained lawyers. The opposite is the case in the UK. A UK user is used to having a, relatively speaking, inefficient court system for c2b disputes with unpredictable costs and outcomes. Therefore, trust in ADR is built through an institutional set-up which does not even attempt to emulate the courts. As opposed to the German example, most ombudsmen and their staff in the UK are not legally trained and come from a range of professional backgrounds.

The findings lead me to recommend that ADR providers pay more attention to their users’ needs through focusing, among other things, on the initial contact and implementing procedural justice measures—within a given culturally specific context. This means: making sure consumers feel heard, have a voice, are dealing with someone who is impartial, and can trust the process. These findings potentially challenge the original purpose of consumer ADR—it is meant to be a quick, cheap and accessible solution to sort consumers’ grievances with businesses. This is made possible through a mainly electronic and digital interaction, ideally cutting out humans. However, my research has shown, especially the more complex a problem is, that a consumer values human interaction and clear guidance through the process. Accordingly, the consumer may even decide to take the case to a court, if that better accords with these values. This poses the challenge of how to design a dispute resolution system in the digital age that is adequate to meet its diverse users’ needs. When designing an ADR process (online or offline), it is important to consider the perceptions and expectations of its users.

Naomi Creutzfeldt is Senior Lecturer at the University of Westminster and Associate Fellow at the Centre for Socio-Legal Studies at the University of Oxford.

]]>The modernization of European Consumer Law: a pig in a poke?https://www.law.ox.ac.uk/business-law-blog/blog/2018/11/modernization-european-consumer-law-pig-poke
In a forthcoming paper in the European Review of Private Law, I discuss the European Commission's proposal for a directive regarding the modernization and better enforcement of European consumer protection rules (COM (2018) 184 final, the ‘Modernization Directive’), and the relation between this proposal and the Commission’s recent Communication ‘A New Deal for Consumers’ (COM (2018) 183 final).Mon, 19 Nov 2018 05:30:00 +0000Marco Loos19935 at https://www.law.ox.ac.ukIn a forthcoming paper in the European Review of Private Law, I discuss the European Commission's proposal for a directive regarding the modernization and better enforcement of European consumer protection rules (COM (2018) 184 final, the ‘Modernization Directive’), and the relation between this proposal and the Commission’s recent Communication ‘A New Deal for Consumers’ (COM (2018) 183 final). As regards better enforcement, the Modernization Directive introduces higher maximum penalties for infringements of the Unfair Commercial Practices Directive (UCPD), the Unfair Contract Terms Directive (UCTD), the Consumer Rights Directive (CRD) and the Price Indication Directive. The modernization of EU consumer law is reflected, in particular, in the introduction of individual remedies for unfair commercial practices in the UCPD, the introduction of some information obligations directed to online platforms in the CRD, the extension of the scope of the CRD to ‘free’ services, and the loss of the right of withdrawal under the CRD for goods that have been used instead of merely tested by the consumer.

I also discuss to what extent the Modernization Directive proposal does justice to the outcomes of the fitness check carried out in 2017. The fitness check was intended to examine the extent to which EU consumer law is still sufficiently equipped for the protection of consumers and allows traders to take advantage of the internal market. For the purposes of EU consumer law, traders are natural persons or companies acting for purposes related to their trade or business and offering goods and services to consumers.

I conclude that when the Modernization Directive is assessed against the recommendations resulting from the fitness check, it is striking how few recommendations have been adopted. Remarkably, in particular, recommendations to codify the case law of the European Court of Justice recommendations that would extend or strengthen consumer protection were not followed. Recommendations that were not followed include the introduction of a blacklist or grey list of unfair terms in the UCTD, the revision of the blacklist of unfair commercial practices under the UCPD, the introduction of the obligation for traders to provide a summary of their main standard contract terms to consumers to the UCTD, and the introduction of a fixed format for the information to be provided to consumers under the CRD. The failure to extend the scope of European consumer law directives to consumer-to-business contracts (i.e. contracts whereby goods or services are offered by a consumer to a trader, e.g. in case where a consumer sells his car to a trader in as the consumer urgently needs the money to pay his bills) is regrettable as well. Disappointing for all stakeholders is the absence of measures streamlining the information that is to be provided on the basis of the different consumer directives: harmonization thereof would make it easier for traders to comply with their obligations and reduce the risk of information overload for consumers. The restriction of the right of withdrawal for goods that have been used rather than merely tested is found to create new problems and fails to solve existing problems.

The biggest oversight, however, is the absence of substantive rules for the relationship between consumer and platform: the idea that merely introducing information obligations for online platforms would suffice neglects the fact that online intermediaries such as AirBnB, Amazon, Booking and Uber are important economic operators themselves. In practice, these platforms often deny having any contractual obligations towards the consumer and/or exclude any liability for non-performance. Although various provisions of the CRD will apply to the services offered by these platforms, the applicability of the UCTD and the UCPD remains an open question since these platforms typically do not require payment in money by the consumer and the scope of these directives has not explicitly been extended to ‘free’ services.

This does not suggest that the Modernization Directive is meaningless or redundant: the proposals on the improvement of enforcement may not go far enough, but they are generally a step in the right direction. The introduction of individual remedies for consumers that have fallen victim to an unfair commercial practice may even be considered an important step forward for consumers in EU Member States that so far have not introduced such a remedy. The extension of the scope of the CRD to ‘free’ services is in line with the proposal for a Digital Content Directive and as such to be welcomed. But all in all, the end result is disappointing. Neither the Modernization Directive itself nor the EU Communication ‘A New Deal for Consumers’ deserves the association with Franklin D. Roosevelt’s ‘New Deal’ – it is rather a pig in a poke.

Marco Loos is a Professor in the Faculty of Law, University of Amsterdam.

]]>The Protection of Investors and the Compensation for their Losses: Australiahttps://www.law.ox.ac.uk/business-law-blog/blog/2018/11/protection-investors-and-compensation-their-losses-australia
Investor protection has been an ideal in corporate and securities law ever since the early 20th century, when Berle and Means famously highlighted shareholder vulnerability in modern public corporations. In more recent times, investor protection has been treated as a litmus test for the quality of a jurisdiction’s corporate governance, and as having a direct link to capital market structure.Fri, 16 Nov 2018 11:00:00 +0000Olivia Dixon, Jennifer G. Hill19997 at https://www.law.ox.ac.ukInvestor protection has been an ideal in corporate and securities law ever since the early 20th century, when Berle and Means famously highlighted shareholder vulnerability in modern public corporations. In more recent times, investor protection has been treated as a litmus test for the quality of a jurisdiction’s corporate governance, and as having a direct link to capital market structure. Corporate governance employs an array of regulatory strategies to address the issue of investor vulnerability. Although some of these strategies focus on shareholder protection, others focus on encouraging greater investor participation as a self-help mechanism. Disclosure is an important regulatory technique from both these perspectives. However, enforcement is critical to its effectiveness.

Our recent Working Paper examines the adequacy of Australian law in protecting public company investors in a particular situation – namely, when they rely to their detriment on inadequate, false or misleading information released by the company. As our paper shows, although investors in these circumstances are in theory protected by the continuous disclosure regime and by the misleading or deceptive conduct provisions of the Australian Corporations Act 2001, the existence of certain carve-out provisions can limit the scope and effectiveness of that protection in practice.

Our paper sets the scene by analysing the regulatory backdrop to Australian corporate and securities law from a comparative perspective. Australia operates under a ‘twin peaks’ model of regulation. Under this model, the Australian Prudential Regulation Authority (‘APRA’) supervises deposit-taking, general insurance, life insurance and superannuation institutions, and the Australian Securities and Investments Commission (ASIC) supervises business conduct and consumer protection. In the aftermath of the global financial crisis, this ‘twin peaks’ regulatory model received considerable attention (and was adopted by some jurisdictions), given that Australia fared relatively well during the crisis. Although Australia’s corporate and financial services regulatory structure shares many features with other common law jurisdictions, including the United States, there are interesting structural differences, which we outline and discuss in our paper.

First, we investigate the current contours of Australia’s capital markets. These markets are highly developed. For example, companies listed on the Australian Securities Exchange (ASX) have a combined market capitalization of A$1.5 trillion, and the financial sector is the largest contributor to the national output. By international standards, Australia also has high levels of capital market investment, partly driven by its distinctive system of retirement funding or ‘superannuation’.

We then examine ASIC’s regulatory role and powers in detail. As we note, ASIC has a far broader remit than most comparable international regulators; indeed, some of its regulatory responsibilities have been described as ‘unique’. ASIC plays a particularly important role in relation to the ‘civil penalty regime’ under the Corporations Act 2001. This is because ASIC is the primary enforcer of contraventions of civil penalty provisions, which include statutory directors’ duties, continuous disclosure requirements, and market misconduct offences, such as market manipulation and insider trading.

Against this broad regulatory backdrop, we consider the specific legal framework under the civil penalty regime, which protects investors that have suffered loss as a result of inadequate, false or misleading corporate information. The paper examines Australia’s continuous disclosure regime, and the consequences of breach of this regime for the company, as well as its directors and officers. The continuous disclosure regime, which dates from the mid-1990s and is based on a ‘fairness’ rationale, is designed to ensure that public company investors are adequately informed on a timely basis and have equal access to market sensitive information. The Australian regime is materially different to disclosure regimes in the United Kingdom, Canada and the United States.

Australian company directors and officers face higher risks of liability for defective corporate disclosures than their counterparts in other common law jurisdictions, as a result of the development of so-called ‘stepping stone’ liability, whereby directors and officers may be liable for breach of their statutory duty of care and diligence for permitting the company to contravene its disclosure duties. Quality is just as important as quantity when it comes to corporate information, and our paper also examines whether the statutory provisions concerning misleading or deceptive conduct in relation to financial services or a financial product provide adequate protection for investors.

Finally, we consider the public and private enforcement mechanisms for contravention of the various provisions discussed in the paper. We note, for example, that although ASIC is the main enforcer of the civil penalty regime, recovery of compensation for affected investors does not appear to be at the foremost of its general enforcement strategy. We also discuss private enforcement by means of statutory derivative suit and shareholder class actions. The number of shareholder class actions, which were non-existent in Australia prior to the 1990s, has risen exponentially since that time. However, as our paper shows, enforcement of statutory breaches through shareholder class actions currently favours substantial settlements over concluded litigation.

Olivia Dixon is Lecturer in the Regulation of Investment and Financial Markets at the University of Sidney.

Jennifer Hill is Professor of Corporate Law at the University of Sydney.

]]>Google v CNIL: Defining the Territorial Scope of European Data Protection Lawhttps://www.law.ox.ac.uk/business-law-blog/blog/2018/11/google-v-cnil-defining-territorial-scope-european-data-protection-law
On 11 September 2018, the European Court of Justice (‘ECJ’) heard arguments in Google, Inc. v CNIL, a case that concerns the territorial scope of European data protection law. Among the questions that the ECJ has been called to examine is that of the extraterritorial application of the right to be forgotten (‘RTBF’).European Union law recognizes that data subjects haveFri, 16 Nov 2018 05:30:00 +000019953 at https://www.law.ox.ac.ukOn 11 September 2018, the European Court of Justice (‘ECJ’) heard arguments in Google, Inc. v CNIL, a case that concerns the territorial scope of European data protection law. Among the questions that the ECJ has been called to examine is that of the extraterritorial application of the right to be forgotten (‘RTBF’).

European Union law recognizes that data subjects have a qualified right to request the erasure of personal data that relates to them. This right is spelled out in Article 17 GDPR and was also previously recognized under the case law of the ECJ and, in a softer version, Article 12(b) of the 1995 Data Protection Directive.

In its seminal 2014 Google Spain judgment, the ECJ determined that Google is a data controller in relation to the processing of personal data carried out in the context of its search activity. Indeed, the Court found that as a search engine operator Google determines the purposes and means of indexing (even though it does not exercise control over the personal data that is published on the web pages of third parties). As a consequence, Google was found liable to comply with requests for erasure under EU data protection law. However, the precise contours of this obligation have become subject to controversy in recent years.

Background

Following Google Spain, the tech giant established internal procedures that enable it to assess requests for erasure. Since 2014, it has received around 723,000 requests, 44% of which it considered to be founded and accordingly delisted corresponding search results. It is worth noting that this only happens where a search is operated in relation to the data subject’s name. As a consequence, the relevant information can still be accessed directly through the link, or when searched for with alternative keywords as it remains available on the original website unless a separate request for erasure is successfully directed at that separate data controller. This highlights that that the right to erasure is not only a qualified but also a limited right.

When Google proceeded to delist results, it only did so in relation to EU domains, such as Google.de or Google.fr, not domains outside of the EU such as Google.com. For the Commission Nationale de l’Informatique et des Libertés (‘CNIL’), the French data protection authority, this wasn’t enough. CNIL requested that Google delist search results subject to a successful request for erasure from all domains worldwide. Only this drastic solution, it argued, could ensure the effective protection of data subjects’ rights. Indeed, where results are merely delisted from EU domains, the information can still be accessed through other domains or by using circumvention methods such as a virtual private network (VPN).

Google appealed the decision, arguing that European authorities shouldn’t extend their own privacy rules across the globe. Indeed, if tech companies had to apply EU law extraterritorially, this would compel them to contravene law in other jurisdictions. To illustrate, there is a risk that when Google applies the RTBF in the US, it might infringe upon the local protection of free speech.

The ECJ decision on the RTBF’s territorial scope is eagerly awaited. It will have pronounced implications in the field of Internet regulation but also more broadly such as in relation to blockchains. It is also worth noting that there are other uncertainties concerning the RTBF, including the precise meaning of ‘erasure’, which is not defined in EU data protection law.

Google as a Regulation Intermediary

The ECJ must now decide whether the RTBF should apply globally. Whereas the CNIL claims that global enforcement is the only way data subject rights can be upheld, Google counters that this would put it at danger of breaching laws in other jurisdictions and set a dangerous precedent, also allowing other jurisdictions to extent the application of their own rules abroad.

These facts underline that Google’s actions determine the reach of EU fundamental rights. This is so as tech firms processing personal data have essentially become regulatory intermediaries. It is Google (not a public authority) that evaluates requests for erasure and essentially takes over the traditional state function of enforcing fundamental rights. Appeals to public authorities are possible, but rare.

As an enforcer of EU law, Google’s application of the RTBF to domains outside the EU would turn it into an exporter of EU law abroad. This, in turn, would further export EU data ethics to the wider world, a phenomenon described as ‘data imperialism’ that increases Europe’s soft power in the wider world.

While it is easy to think of this as a positive evolution as the EU creates higher standards of rights protection than many other parts of the globe, it is also worth reflecting on whether this same dynamic is still as welcome if a global tech company were to impose restrictions to the freedom of expression as they exist in other parts of the world to the EU. These possibilities highlight the tension between territorial jurisdiction and the global internet.

The Mismatch Between Territorial Jurisdiction and Global Data Flows

Google v CNIL essentially highlights the incompatibility between principles of territorial jurisdiction and global data flows. Both parties have a point. The CNIL rightly insists that the RTBF can only be effectively enforced if information is genuinely ‘deleted’ not just on EU domains.

At the same time, Google rightly pinpoints that an obligation to apply the RTBF extraterritorially may compel firms to breach law elsewhere. The ECJ’s obligation to choose the winning argument is no easy feat, especially since both positions are based on distinct perspectives. Whereas the CNIL focuses on individual rights protection, Google insists on the broader economic and societal implications.

The application of principles of territorial jurisdiction to global data flows is both challenging and controversial. Indeed, online information has become increasingly regulated over time, as highlighted by the ongoing upload filter debate in the EU, the Great Chinese Firewall and German legislation on hate speech and fake news. Besides these controversial examples of (attempts of) regulating the flow of data online, Google v CNIL underlines the practical difficulties in doing so. Indeed, one may wonder, what is the point of applying EU data protection norms online if these are not enforced globally.

As regulators across the globe are changing their approach towards online regulation from a stance of non-interference to increasing constraints, the question of how the internet can remain a world wide web of information looms large. Yet, in the absence of global consensus regarding the treatment of online information, states are left with a choice of no regulation, or regulation that may be hard to enforce. Naturally, the regulation of online information raises a range of societal and moral questions. It also has a huge economic impact. In the age of the data-driven economy digital barriers also risk stifling trade and innovation.

Historical evidence amply confirms that when technology changes, law changes too. Yet, the change required to accommodate the above dynamics would be a partial reconsideration of the very principle of territorial sovereignty in the form of international regulation. This of course has long existed in the form of trade treaties and so forth, but reaching consensus on how to treat personal and non-personal data internationally appears futile at this moment in time.

The Court’s Decision

In Google v CNIL, the ECJ is faced with a very specific facet of that broader dynamic. The French Conseil d’Etat (that adjudicates the dispute at the national level in France) referred four questions for preliminary ruling to Luxembourg.

First, whether the de-referencing following a successful request for erasure must be deployed in relation to all domain names irrespective of the location from where the search based on the requester’s name is initiated, even if that occurs outside of the EU.

Second, if the first question is answered negatively, whether the RTBF must only be implemented in relation to the domain name of the Member State from which the search is deemed to have been operated or, third, whether this must be done in relation to the domain names corresponding to all Member States.

Fourth, whether the RTBF implies an obligation for search engine operators to use geo-blocking where a user based in (i) the Member State from which the request for erasure emanated or (ii) the territory of the EU searchers non-EU domains.

It would be surprising if the Court concluded in relation to questions two and three that delisting does not extend to the entire territory of the EU. Indeed, the ECJ has continuously insisted that data subjects must benefit from a high degree of protection, and the creation of digital divides within the EU seems to conflict with free movement and common legal space rationales.

The answer to question four depends on the strength of protection the ECJ wants to afford. Indeed, using geo-blocking would be a technical measure to enforce protection as users could not circumvent delisting on, say, Google.be by using Google.com. The RTBF is not, however, an absolute right. The text under the GDPR makes this clear and even where a request is granted, delisting only applies where a search is made in relation to the name of the data subject concerned. That is to say that the information doesn’t disappear from Google search and can still be found where alternative keywords are used. In hearings, Google appears to have stated that it already employs geo-blocking but only where the search is operated in the state the request for erasure emanates from, and that where it does, it is 99,94% accurate in determining people’s location.

Question one is by far the most controversial and hardest to resolve. Whereas geo-blocking would block EU residents’ access to information on international domains, but leave information on these domains in place, this option would require an outright delisting of search results on these domain names even when they are accessed from outside the EU. This would properly result in the extraterritorial application of the GDPR. How the Court will decide this matter remains to be seen. But it is worth noting that the European Commission, known for its expansive approach towards the GDPR’s territorial application, has warned against such a broad interpretation as this would stretch EU data protection law beyond its intended scope. Indeed, it is widely recognised that exercising the RTBF in relation to one data controller does often not entail an absolute unavailability of the relevant data (as underlined by the facts of Google Spain). On the other hand, the ECJ seems to have created a new principle of ‘effective and complete protection’ under the GDPR, which it first mentioned in Google Spain and subsequently affirmed in Wirtschaftsakademie Schleswig Holstein to justify a broad interpretation of the notion of the data controller under the GDPR. The Court could rely on the same principle to justify a broad interpretation of the RTBF’s jurisdictional scope.

The answer to these questions will have significant legal and geo-political implications. An Advocate General opinion is expected on 11 December and a judgment should follow in 2019.

Michèle Finck is a Senior Research Fellow at the Max Planck Institute for Innovation and Competition and a Lecturer in EU Law at Keble College, University of Oxford.

]]>Creditor Governance https://www.law.ox.ac.uk/business-law-blog/blog/2018/11/creditor-governance
In our paper, ‘Creditor Governance’, we investigate the degree to which large creditors exert influence over borrower investment decisions, and whether creditor-influenced changes in firm policies result in improved borrower profitability and operational efficiency.There is a large literature concerning firm governance driven by institutional shareholders. However, the universe of firms issuing equity is small compared to the numberThu, 15 Nov 2018 11:00:00 +0000Tomas Jandik, William R. McCumber19976 at https://www.law.ox.ac.ukIn our paper, ‘Creditor Governance’, we investigate the degree to which large creditors exert influence over borrower investment decisions, and whether creditor-influenced changes in firm policies result in improved borrower profitability and operational efficiency.

There is a large literature concerning firm governance driven by institutional shareholders. However, the universe of firms issuing equity is small compared to the number of firms issuing private debt. According to the Loan Pricing Corporation, firms in the United States issued 2 trillion (USD) in loan shares in 2016 compared to less than 250 billion (USD) in equity issuance. If, as Shleifer and Vishny (1997) argue, ‘corporate governance deals with the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment,’ it is logical to assume creditors assert some influence over borrower firms.

Though creditor monitoring of borrowers is a routine part of portfolio risk mitigation and regulatory compliance, the traditional view of creditor governance is that creditors are passive investors until a borrower violates a covenant threshold, thereby triggering a technical default, or worse, misses a payment. In such cases, creditors renegotiate borrowing terms and are able to direct some changes in borrower firm investment decisions. There is ample evidence that in the event of a technical or payment default, creditor-driven changes improve borrower financials and profitability.

There is no a priori reason to believe creditors are passive investors until a borrower defaults, however, despite the concern that ‘pernicious control’ of borrower decision-making potentially exposes creditors to additional liability if it is found that the lender exercised an ‘unreasonable’ level of control over the borrower. Since the great majority of loan contracts are not breached, it is important to better understand the governance role creditors play in portfolio firms under normal circumstances.

We present evidence that, subsequent to loan origination, borrower firms are not only significantly less likely to become distressed, eg file for bankruptcy protection, but also shift investment decisions away from value-reducing policies and toward value-creating investments. Changes in financing and investment decisions are economically meaningful; borrower cash flows and profitability significantly improve at least three years after loan origination, especially for those firms most likely to have underinvested in profitable opportunities in previous years. Shareholders react positively to news of syndicated loan issuance. Cumulative abnormal stock returns around loan issuance are positive and significant.

Theory predicts that when borrower firms are more opaque, lead arrangers must retain a greater proportion of loan shares to clear the market. We quantify the seriousness of information asymmetry present in a loan issue not via a general proxy for borrower opacity, eg research and development expenses, but by the degree to which the spread at origination deviates from what is expected on a risk-adjusted basis. We find that when market-clearing spreads are higher or lower than one would expect given observable borrower characteristics, underwriters retain a greater proportion of loan shares.

Since more concentrated holdings expose creditors to greater idiosyncratic risk, we should find more evidence of creditor influence when they hold larger positions in borrower securities. At the means, lead underwriters’ loan portfolios retain 12 million (USD) in additional borrower exposure when spreads are lower than expected, and 23 million (USD) in additional exposure when spreads are higher than expected. We present evidence that creditor influence is more evident when lenders are exposed to greater risk. Decreases in cash, acquisition activity, shareholder payouts, and salary expenses are more pronounced when creditors hold more concentrated positions. Heightened creditor governance is associated with increasing investment in inventories, capital expenditures, and property, plant, and equipment. Further, firm profitability and cash flows from operations are higher when creditor positions are more concentrated.

Because prior literature shows that creditors intervene in firm policies after a technical violation of a loan agreement (Nini, Smith, and Sufi, 2012; Becher, Griffin, and Nini, 2017), and that these interventions improve firm financials and performance, we re-examine whether our findings are driven by loans that are likely to be renegotiated following a technical default. We provide strong support of previous findings that creditor governance post violation is a strong determinant of changes in firm policy and performance. We also find that our previous results hold, even when creditor governance before a covenant violation is markedly different than after one. For example, prior to a default, creditor influence increases borrower investments in productive assets, while after a violation, borrowers are more likely to sell assets to improve liquidity.

Finally, we want to understand the impact of creditor governance relative to shareholder governance. We compare the governance effects of large institutional creditors to those effected by large institutional shareholders. We find that the presence of a large institutional stakeholder, whether creditor or shareholder, is a strong determinant of changes in firm policies and performance; coefficients share the same sign and are of comparable economic and statistical significance. In other words, though previously thought to be silent providers of capital – at least until a borrower is in trouble – creditors, like institutional shareholders, serve a valuable and important role in corporate governance.

Tomas Jandik is a Professor of Finance at the Sam M. Walton College of Business, University of Arkansas

William R. McCumber is the JPJ Investments Endowed and Assistant Professor of Finance at Louisiana Tech University

]]>Ten years After the Financial Crisis: 'We Are Safer, But Not As Safe As We Should and Could Be'https://www.law.ox.ac.uk/business-law-blog/blog/2018/11/ten-years-after-financial-crisis-we-are-safer-not-safe-we-should-and
The bankruptcy of Lehman Brothers, now ten years ago, was neither the start nor the peak of the financial crisis. Yet, the demise of the iconic investment bank, the fourth-largest in the United States, marked the point at which the unthinkable became real: A landmark institution, loaded with low-quality securities and protected by little capital, teetered—and the government allowed itThu, 15 Nov 2018 07:48:00 +0000Thom Wetzer, Jure Jeric, Alexandra Zeitz19995 at https://www.law.ox.ac.ukThe bankruptcy of Lehman Brothers, now ten years ago, was neither the start nor the peak of the financial crisis. Yet, the demise of the iconic investment bank, the fourth-largest in the United States, marked the point at which the unthinkable became real: A landmark institution, loaded with low-quality securities and protected by little capital, teetered—and the government allowed it to fail. As confidence dissipated and uncertainty grew, a total collapse of the financial system seemed not only possible but also plausible.

Ten years later, experts from academia and industry gathered at the University of Oxford to reflect on what happened. As part of a conference on the political economy of finance for early career researchers, the panel was asked to revisit what went wrong, whether the actions that were taken to prevent a repeat of the crisis seem sufficient, and what risks could forestall a new crisis. Sir John Vickers, Warden of All Souls College at Oxford University, former member of the Bank of England’s Monetary Policy Committee and chair of the UK’s Independent Commission on Banking, captured the mood well when he noted: 'We are safer, but not as safe as we should and could be.'

What Went Wrong?

Vickers noted that the set of economic circumstances that preceded the crisis, although extraordinary, are too often given too much credit for what followed. 'It was not a perfect storm. The biggest surprise of the crisis was not the shock, but the fragility it exposed.' Emblematic for that fragility was the leverage in the financial system, which Vickers described as 'extreme.' And that is only what we know. Karthik Ramanna, Professor of Business and Public Policy at Oxford’s Blavatnik School of Government, noted that the accounting underlying the capital requirements and the reporting of leverage ratios obscured much leverage: 'The tier-one capital [the highest-quality assets that regulators require banks to hold] are full of potentially non-performing assets.' Furthermore, the capital was supposed to be held against the risks generated by the products the banks held or were exposed to. But many of these products, Ramanna noted, were novel, complex, and ill-understood. The fragility we observed by looking at leverage ratios, in other words, was only the tip of the iceberg.

Grace Blakeley, a research Fellow at the IPPR Commission on Economic Justice, argued that fragility was not only endemic in the financial sector but characterized the broader economic model it was a part of. 'For decades, returns in the real economy were low, which created global imbalances and a hole in aggregate demand. Financialization helped fill that hole, in ways that we now know may have been artificial and unsustainable.'

Have We Fixed the Financial System?

Following the crisis, there was little debate about the need for reform of the financial system. Instead, much of the debate centered on the question of the design of these reforms. Ten years on, banks have to hold more capital, are subjected to liquidity requirements, face more stringent governance and compliance expectations, and have had to submit resolution plans to aid resolvability in times of crisis.

Despite that progress, Vickers is not satisfied. 'The discussion on capital has got to a really weird place. You have the officialdom, with the Governor of the Bank of England [Mark Carney] as a leading exponent, holding the view the system is now sufficiently capitalized. At the same time, others—most economists outside the official sector—stress that leverage can still be thirty [debt of thirty times equity], and instead want to see that multiple much lower, say at ten or even three. I would put my own view between these two; regulators should have increased capital buffers much more than they have.' Emily Jones, Associate Professor at Oxford’s Blavatnik School of Government and chair of the panel, asked why more ambitious regulation of leverage ratios had not been introduced. Vickers suggested that while it may be because 'officialdom is right,' it likely was also driven by the process of reaching international agreements, 'which tend to reach the lowest common denominator.'

Giles Keating, managing director at Werthstein and a former Global Chief Economist at Credit Suisse, also sounded a cautionary note. He noted that 'an awful lot of progress has been made,' citing in particular the increased capital requirements, but stressed that focusing just on regulatory change in banking regulation obscures instabilities elsewhere in the system. 'The financial system is an ecosystem; all parts are closely related. Changes in one area can have effects on different players in different ways. Perhaps, the financial system is more complicated than a natural ecosystem, because there is this layer of players gaming the system superimposed on it.' Even if raising capital requirements for banks was the right idea, doing so without evaluating and mitigating the spillovers that might affect other parts of the financial ecosystem—particularly related to financial activity moving into the more lightly regulated shadow banking sector—is not necessarily a prudent move. Borrowing may have moved outside banks, but that does not necessarily make the financial industry less fragile.

On the question of whether the system is now safer, Blakeley countered with 'safer for whom?' She stressed that while regulatory interventions in the aftermath of the crisis no doubt made the financial system more stable, they coexisted in the UK with policies that have done little to address inequality or economic stability for the most vulnerable. She urged that legacies of the financial crisis be seen holistically, rather than analyzing monetary and regulatory interventions separately from fiscal policy, and instead advocated for more comprehensive and robust public interventions to address stagnating wages and faltering productivity growth.

Risks On the Horizon: The Old and the New

Keating expressed concerns that, particularly in the realm of monetary policy, there are spillovers that could plant the seeds of a future crisis. He explained that he holds a 'darker' view of the 'knock-on effects of regulatory changes.' 'As we escaped from the global financial crisis, quantitative easing and ultra-low interest rates were important,' he said. 'But this has gone on for too long.' As a consequence, Keating argued, we now witness the emergence of asset bubbles in the bond market and debt levels that are even higher than before the crisis (resulting in dangerously high leverage in the US corporate sector). Keating argued that this has been made worse by a lack of coordination by monetary policymakers, citing the example of how Japan’s low target for ten-year government bond yields might have encouraged people to move their capital abroad. 'This is yet another example of unintended policy spillovers.'

'We have to wonder how this will end,' Keating concluded. 'This year’s crises in emerging markets are merely a foretaste. As inflation comes back into the system, which is inevitable now that central banks (led by the US Federal Reserve) have to begin to raise rates, the weakest parts of the system are squeezed first, as is always the case at the end of a credit cycle.' This will affect emerging markets, but also corporate debt—particularly but not exclusively in the United States. The fact that market-making, as a consequence of regulatory reform, is not as easy as it once was only makes matters worse. 'The good news, however, is that the banking system is safer. This matters a lot, as this is the store of value for many people and the way that many financial transactions are processed.' But banks, he cautioned, will not be exempt from the nasty credit cycle entirely.

Apart from capital standards being too low, the unresolved challenges relating to accounting standards in capital regulation remain a source for concern, Ramanna noted: 'Major banks in Europe have very low price-to-book ratios—essentially the market’s assessment over the accountant’s assessment. If the market is right, there is a very substantial over-measuring of capital in the bank.' The regulation, and the stress tests used by central banks to evaluate the bank’s resilience, rely on the accounting measure. Ramanna: 'These tools are only as good as [the accounting numbers] that go in there.' Vickers suggested that banks with low price-to-book ratios should be subjected to additional stress tests that are based on market measures of capital.

Keating was supportive of the idea, noting that it would help regulators to use the information produced by markets and also help overcome some of the informational asymmetries governments suffer from when regulating financial institutions. At the same time, he was skeptical that the proposal would be implemented. 'Looking at the price-to-book ratios of banks, you can very clearly see the variation across countries and regions. US banks are performing relatively well, but the same cannot be said about their European counterparts.'

Blakeley claimed that expertise is (still) divided unequally between the private sector and the government, which makes it harder for government to effectively regulate the financial system. Explaining how patterns of regulatory influence can be skewed, she said: 'This is a matter of money and power…. It erodes the trust in government.'

Finally, drawing attention to the larger economic context, Ramanna stressed future political challenges arising from computerization and the changing structure of work in advanced economies. Noting that most advanced economies, especially the UK, experienced stagnating productivity growth, he argued that future economic growth was likely to come from technology and computerization. This will result in a massive transformation of the labor market—recent research by Carl Frey and Michael Osborne at the Oxford Martin School has suggested up 47 percent of jobs are vulnerable to computerization. Managing such a disruptive change in the economy equitably and fairly will be a major political challenge going forward.

A Call to Action

In the end, the key to preventing crises is to be aware of the developments around you and critically evaluate them. Vickers spoke frankly: 'Many who should have known what was going on—also in academia—were totally unaware. For example on the ballooning of leverage, I should have known, but I did not.' He concluded that engagement is key, too: 'When the Bank of England consulted on extra capital buffers for big banks, it received just four responses, and one was mine.'

The academic community can be occasionally slow in engaging with policy makers and challenging the dominant paradigms. Early-career scholars’ remarkable interest in asking difficult questions on political economy of finance, however, suggests there is room for optimism.

The research portion of the conference included presentations from emerging scholars on complex challenges in the political economy of finance, often with deep distributional repercussions. There were three key lessons learnt from junior scholars’ presentations. First, there is a great value in moving beyond disciplinary boundaries to ask important questions. In just two days, presenters showcased the breadth of the emerging scholarship in political economy of finance, ranging from a historical perspective on early 20th century Swiss capital requirements to the recent reforms in Turkey, China, and the United States. At the international level, scholars asked why countries rely on domestic insurance mechanisms (rather than the global financial safety net) and how principles of bankruptcy law can be applied to sovereign debt.

Second, conversations among scholars from different disciplinary backgrounds are essential for gaining a thorough understanding of how markets operate, and the extent to which better cooperation between multiple stakeholders can support sustainable capitalism. Third, to address the most pressing challenges of today’s globalized economy, it is vital for the academic community to engage with practitioners to have a clear voice in the policy arena.

This post was originally published on ProMarket - the blog of the Stigler Center at the University of Chicago Booth School of Business.

]]>The avoidance of related party transactions in insolvencyhttps://www.law.ox.ac.uk/business-law-blog/blog/2018/11/avoidance-related-party-transactions-insolvency
Transaction avoidance rules are widely thought to be an important tool in the regulation of related party transactions entered into by an insolvent or near insolvent firm. Such rules offer direct recourse against related parties who have received gifts or asset transfers at a significant undervalue, or received payment ahead of non-related creditors outside of the ordinary course of business.&nbsp;SecurityWed, 14 Nov 2018 10:24:54 +0000Kristin van Zwieten19986 at https://www.law.ox.ac.ukTransaction avoidance rules are widely thought to be an important tool in the regulation of related party transactions entered into by an insolvent or near insolvent firm. Such rules offer direct recourse against related parties who have received gifts or asset transfers at a significant undervalue, or received payment ahead of non-related creditors outside of the ordinary course of business.

Security interests over firm assets may restrict opportunities for such transactions to be entered into (given restrictions on the ability to dispose of the asset free and clear of the security interest, except perhaps in the ordinary course of business), but security will not always be available, and in any case has its own costs.[1] Transaction avoidance rules can thus be considered a useful complement, particularly where rules imposing personal liability on controllers are (perhaps because of weak prospects of enforcement) not sufficient to deter entry into such transactions.

Existing 'best practice' guidance on the design of transaction avoidance rules suggests that such rules are best housed within collective insolvency procedures, where an independent trustee or insolvency practitioner can be recruited to investigate pre-commencement transactions and litigate on behalf of the general body of creditors, the fruits of their industry enuring for creditors’ collective benefit. But the commencement of insolvency proceedings can also reduce the value of the debtor’s estate. Corporate insolvency procedures are highly complex; they require sophisticated infrastructure, including well-resourced and independent courts, for effective implementation. The weaker this infrastructure, the graver the risk of value destruction in insolvency proceedings.

Where courts are weak, creditors may thus prefer to see firms fail outside of collective insolvency procedures, even if this means foregoing opportunities to use the transaction avoidance tools available within them. Consistently with this, Claessens and Klapper (2005) find that bankruptcy filings are more frequent in countries with better functioning judicial systems. Other qualitative literature similarly reports non-usage of bankruptcy laws in emerging markets, linked to inefficiencies in enforcement and implementation.

This suggests that avoidance tools may be most powerful when available outside insolvency proceedings as well as within them, so as to be available for use by creditors in circumstances where the commencement of collective proceedings is considered by all creditors to be unnecessary or undesirable. Creditors using such rules will not, of course, be able to avoid courts. But transaction avoidance rules are likely to be simpler to adjudicate than corporate insolvency proceedings are to supervise, and their outcome is less likely to have the kind of political salience that might warrant state intervention. As such, weaker courts might be predicted to be more effective in applying avoidance rules outside insolvency proceedings than they are in supervising an insolvency practitioner investigating suspect transactions as part of the performance of a suite of functions in a collective procedure.

Making transaction avoidance rules available to creditors outside insolvency proceedings is hardly a novel idea. Fraudulent conveyance law is ancient, and its relief has never been conditioned on the commencement of collective proceedings. Under Roman law what became known as the actio Pauliana was available both in and outside early prototypes of bankruptcy procedures; it allowed a creditor harmed by the (intentional) disposition of an asset of the debtor to have recourse to the transferee, as if the asset the subject of the conveyance had not been validly transferred.[2] The common law analogue, appearing first in statutory form in 1376 [3], similarly predated the introduction of procedures for collective execution.[4] Many jurisdictions have retained some form of this action, often described as the ‘actio Pauliana outside bankruptcy’, on their statute books. But these forms of action have received little attention in international best practice guidance on the design of insolvency and creditor rights regimes, have not been studied systematically by empiricists, and have not benefited from international initiatives to improve the efficacy of domestic insolvency rules in cross-border cases.

In a chapter in a forthcoming book edited by Luca Enriques and Tobias Tröger (The Law and Finance of Related Party Transactions, CUP 2019), I make the case for a renewed focus on the actio Pauliana outside bankruptcy; I explore aspects of the design of such actions, including by considering whether it is coherent for such actions to encompass preferential as well as non-preferential transactions, even though the result in the former case is the reversal of a payment in favour of one creditor with a view to favouring another (I conclude that it may be); and I suggest that in cross-border cases a convention on the recognition and enforcement of the actio Pauliana outside bankruptcy is both desirable and, if limited to non-preferential transactions, potentially feasible.

Kristin van Zwietenis the Clifford Chance Associate Professor of Law and Finance at the University of Oxford.

[2] William Warwick Buckland, A Textbook of Roman Law from Augustus to Justinian (3rd ed., CUP 1966) 595-596; Ilaria Pretelli, ‘Cross-Border Credit Protection Against Fraudulent Transfers of Assets: Actio Pauliana in the Conflict of Laws’ (2011) 13 Yearbook of Private International Law 590, 595.

[3] 50 Edward III, cap. 6 (1376), noted in F.W.S. Cumbrae-Stewart, ‘The Actio-Pauliana: its origin, nature and development: being a dissertation on frauds upon creditors in the civil law’ (doctoral dissertation, 1920, University of Oxford).

[4] Louis Edward Levinthal, ‘The Early History of Bankruptcy Law’ (1918) 66 University of Pennsylvania Law Review 223, 227.

]]>Can Companies and M&A Law in Europe Adapt to the Market for Corporate Control? https://www.law.ox.ac.uk/business-law-blog/blog/2018/11/can-companies-and-ma-law-europe-adapt-market-corporate-control
Takeover regimes in Europe have been under persistent scrutiny by the public, politicians, and market participants. Sometimes, that is just the nature of the game: Takeovers create winners and losers, and the latter (with the help of their champions and constituencies) often complain. But other times the discontent derives from the inadequacy of regimes in handling certain deals. The taskWed, 14 Nov 2018 05:30:00 +0000Matteo Gatti19973 at https://www.law.ox.ac.ukTakeover regimes in Europe have been under persistent scrutiny by the public, politicians, and market participants. Sometimes, that is just the nature of the game: Takeovers create winners and losers, and the latter (with the help of their champions and constituencies) often complain. But other times the discontent derives from the inadequacy of regimes in handling certain deals. The task of the law is not easy: Deals are complex and unique, while the law is general. In particular, target companies have a particular ownership structure that must fit the paradigm contemplated by the law, which in the EU consists almost entirely of bright-line rules. In a recent paper to be published in the Columbia Journal of European Law, I show that (a) the discontent is mostly attributable to the fact that the law often does not get the ownership structure and the deal right, and (b) legislatures typically try to fix past mistakes with new one-size-fits-all regimes that are overreactive, stymie the market, and create new opportunities for regulatory arbitrage.

Upsetting Deals Lead to Reforms

There is consensus that corporate and securities laws are reactive in nature. The most prominent reforms have been prompted by either scandals or systemic failures. In the U.S., the Enron debacle and similar scandals and the financial crisis were crucial for passing SOX and Dodd-Frank, respectively. European M&A law is no stranger to this dynamic, but its reform cycles are much faster. That is because M&A reforms in Europe are not necessarily scandal driven—they are deal driven. Consider the following incidents, which I present in my paper as evidence of a recurring pattern.

Rumors of a potential acquisition of French dairy products giant Danone by PepsiCo prompted the French legislature to amend its takeover laws with a harsh provision for acquirers: At its discretion, the securities regulator may require a person who is believed to be launching a takeover bid to state if in fact s/he intends to proceed—any such statement must then be honored for six months. Also, in the aftermath of the highly contested takeover of Arcelor (a Luxembourg company with headquarters and the bulk of operations in France), the French Parliament passed a law that introduced tenure voting, abandoned the board neutrality approach (which required a shareholder vote to authorize frustrating actions against a pending bid), and added further hurdles for hostile bidders, such as a minimum tender condition of a majority of the target’s issued shares. Finally, shortly after the politically charged acquisition of Alstom’s energy operations by GE, France extended the reach of its own veto powers over takeovers affecting national strategic interests.

In Italy, the migration of Italian automaker Fiat (reincorporated in the Netherlands and listed in London), as well as the creeping acquisition of Parmalat by its French competitor Lactalis (i) contributed to the lifting of a long-standing prohibition against multiple voting shares, (ii) lowered the mandatory bid threshold from 30 percent to 25 percent for large cap companies (anyone crossing such a threshold must make an offer for all shares at a price not lower than the highest paid in the 12-month period prior to crossing it), and (iii) resulted in what is already Italy’s third attempt at implementing the board neutrality rule—first adopted as mandatory, the rule was turned into an optional regime in 2009, and is now a default companies can opt out of. More recently, Vivendi’s creeping acquisitions of Telecom Italia and Mediaset resulted in revisions to the regulation of disclosure of significant holdings, which now requires the acquirers of 3 percent of the voting stock to reveal their goals with respect to the target for the six months after the purchase. In such occasion, the government considered, but subsequently abandoned, introducing veto powers similar to those passed in France.

The Endesa saga in Spain showed how little a Spanish target could do to preserve its independence facing an unsolicited takeover. To rebut the hostile attempt by Gas Natural in September 2005, Endesa could only resort to seeking out a white knight, German utility E.On, but because of governmental intervention, it was ultimately acquired by a consortium comprising Italy’s energy giant Enel and Spanish infrastructure conglomerate Acciona. In 2007, when implementing the Takeover Directive, Spain loosened its board neutrality rule, introduced a reciprocity principle with respect to such a rule (but only applicable to foreign companies), and banned partial tender offers, which in the past had facilitated creeping acquisitions. Also, the controversial creeping acquisition of Iberdrola by Florentino Perez’s ACS, resulted in two Spanish governments passing in sequence two opposite measures: first, to lift the 10 percent voting cap in the target’s articles of associations and thus allow ACS to vote all its shares at the shareholder meeting (the measure was ironically dubbed the “Florentino law”); then, to abolish the Florentino law and reinstate the voting caps, amidst fears that such law, together with the board neutrality rule, was facilitating hostile takeovers, especially foreign ones, too much.

As political retribution for the Vodafone takeover of Mannesmann (to this date, the largest M&A deal ever), Germany orchestrated the demise of a proposal of a takeover directive endorsed by the UK at the European Parliament, and passed two takeover acts, one in 2002 and the other in 2006, neither of which required shareholder authorization for takeover defenses. Also, the creeping acquisition of Hochtief by ACS raised concerns over the effectiveness of the German takeover act against lowballing practices (launching an offer at a low price from a starting point that is right below the 30 percent mandatory bid threshold). The ACS example showed that, if purchases of stakes from blockholders are timed carefully to occur outside the relevant time window for setting the tender offer price, the German regime does not ensure an equal distribution of the control premium. In the aftermath of such a deal, the Social Democratic Party made a proposal in parliament to extend, for particular cases like Hochtief, the time window that sets the offer price, but no law was ultimately enacted.

In the UK, in early 2010, Kraft managed to grab control of Cadbury after a 19-week standoff. There was a push to review takeover rules when disappointed investors and public opinion realized that UK takeover law did almost nothing to protect a revered and iconic company like Cadbury from being taken over by a foreign buyer that was incapable of making good on certain commitments regarding the workforce. The Takeover Panel (i) introduced disclosure and monitoring rules, as well as enforcement powers, on employment-related commitments made by the bidder to non-shareholder constituencies (so-called ‘post-offer undertakings’), (ii) severely limited break-up fees, and (iii) crystalized in a bright-line rule its ‘put up or shut’ approach by fixing to a 28-day deadline the time a potential offeror has to announce either a firm intention to make an offer or that it does not intend to do so (in which case it will be prohibited for a six-month period to launch an offer on the same target). The long wave of the Cadbury deal can still be felt today. Recently, to make good on a promise by U.K. Prime Minister Theresa May to protect local workers and communities from deals like Cadbury and the attempted (but ultimately failed) acquisition of AstraZeneca by Pfizer, the U.K. government has proposed sweeping changes to its merger regulations that can result in extensive review and possible veto of inbound deals on the basis of, among other things, national security. According to commentators, the move is largely driven by protectionist intent, not national security concerns, and can lead to reviewing as many as 200 deals per year (while in the last 15 years only 10 deals were reviewed on national security grounds).

The “Reform Loop”

In my paper, I label the pattern described above as a ‘reform loop.’ Over time, M&A markets experience controversial acquisitions that upset investors, local politicians, and the public. Vodafone/Mannesmann, Olivetti/Telecom Italia, Endesa, Mittal/Arcelor, Kraft/Cadbury, and Vivendi/TIM are only the most reverberating deals in a much larger group of transactions that took place in Europe in the last 20 years or so. The EU Takeover Directive itself is the product of such a pattern. According to some accounts, talks of a harmonized takeover regime were a partial consequence of the attempted cross-border hostile takeover of Société Générale de Belgique by Italian entrepreneur Carlo De Benedetti in the late 1980s.

Generally, inadequate price, concern for the fate of employees, and the foreign identity of the acquirer are recurring features that raise criticism. As a result, public outcry ensues, often demanding changes to the existing rules to address the very issues that made the acquisition so controversial. New rules get promulgated, but they are either overkill (eg, introducing tenure voting or giving the government open-ended veto power over foreign investment) or insufficient because soon enough a new deal emerges to reveal a different, ‘new’ issue overlooked by the reform itself (Italy’s reform to lower the MBR threshold and chill creeping acquisitions did absolutely nothing to block Vivendi from getting de facto control of TIM, even if just temporarily, and negative control of Mediaset). Because of the inadequacy of the legal framework, in some instances national governments intervene to block a deal or to favor one contender over the other, thus adding a layer of uncertainty for any future deals. The Endesa saga, in which the Spanish government opposed E.On’s intervention as white knight, is a case in point.

The Case for Adaptability

In my paper, I advance a thesis and a proposal. First, with few exceptions, policymakers have failed to grasp that M&A dealmaking is a product of the underlying ownership structure of the company. The reason why so often the legal and regulatory framework is incapable of addressing the issues of the particular deal is because the deal is unique, because the given target and its very ownership structures are unique. This feature is not news to M&A practitioners; after all, they pride themselves on working on transactions that are always different. But it is one thing to tweak an acquisition agreement among private parties to fine-tune it to their interests and needs, and another to have a legal and regulatory framework that fits all potential deals. Hence, the proposal is that policymakers throughout Europe should consider an approach that has thus far been either overlooked or not fully explored: adaptability. The regime itself should be able to adapt to the specific features of the target (its ownership structure in particular) and of the deal itself, via a mix of private ordering and ex-post adjudication standards.

Without adaptability, there is no easy way out of the reform loop. In fact, the upsets in European M&A have continued to occur because, under the current M&A regime, the law that a company is subject to is seldom adaptable to its ever-changing ownership structure (structure-adaptation) or to the specifics of the deal (deal-adaptation). For instance, the rigid nature of the mandatory bid rule (MBR) and its triggering thresholds might not be able to capture situations in which a company is controlled below the specified thresholds—in such a scenario, the MBR does not fit, and the company cannot adapt the rules of the game to its peculiar ownership structure. On the other hand, deals that seek to exploit investors with low-ball offers might find directors unable (because of various restrictions to defenses) or unwilling (because of collusion with the offeror) to bargain effectively on behalf of their shareholders. Here, the rules of the game, for one reason (lack of defenses) or another (unfettered discretion for directors to agree to friendly deals with little or no judicial review), cannot be adapted to counter a low-value deal. Put another way, investors keep getting new bright-line rules whose rigid nature is structurally incapable of fulfilling what investors need, which is responses tailored to the very deal—something that an adaptable environment would instead allow.

How do we achieve adaptability? Here comes the difficult part. The two main avenues to reach such a goal, private ordering and judicial standards, contemplate some discretion for a decision-maker in order to take context into account. Private ordering strategies empower companies to tailor the framework that is most suitable to them in light of the underlying circumstances (present and foreseeable). Alternatively, or in addition, another approach is to adopt standards that grant discretion to an adjudicator, who can craft the adequate framework in light of the facts and circumstances of the specific case, including the underlying ownership structure of the company and the economics of the deal on the table.

To some extent, the EU takeover system has tolerated timid steps toward freedom of contract in setting the rules of the game. When member states opt out of the board neutrality rule, local companies have the ability to opt back into it with their bylaws (though none do). In a way, the UK system also relies on the latter approach, given the open-ended nature of its takeover regime, as well as the ample discretion awarded to the Takeover Panel in administering and enforcing the Code.

Note that outside the EU, the Delaware system relies on a combination of both of these policy options. On the one hand, thanks to the availability of the poison pill, companies can rely on an adaptive device to fend off acquisitions they believe are not in the best interests of their shareholders (but shareholders can overrule them via a proxy fight, in the absence of which the pill pretty much represents an absolute obstacle to a subpar deal). On the other hand, the most important aspects of Delaware M&A law are shaped by different standards of review, which are triggered by events and circumstances where the actual ownership structure of the target plays a crucial role.

My paper sits within the growing body of literature emphasizing the importance of ownership structures in corporate governance and, especially, M&A. My specific contribution is to draw attention to how legal or regulatory obstacles to structure-adaptability and to deal-adaptability can leave many problems currently faced by European companies and its shareholders unresolved, and lead to a potentially never-ending series of misguided catch-up reforms that present new problems without satisfactorily taking care of the old ones.

Matteo Gatti is Professor of Law at Rutgers Law School. This post is based on his recent paper, “Upsetting Deals and Reform Loop: Can Companies and M&A Law in Europe Adapt to the Market for Corporate Control?,” forthcoming Columbia Journal of European Law (2018) and available here. This post first appeared here.

]]>A Book Review: Humans as a Service (OUP 2018) by Jeremias Prasslhttps://www.law.ox.ac.uk/business-law-blog/blog/2018/11/book-review-humans-service-oup-2018-jeremias-prassl
Humans as a Service: The Promise and Perils of Work in the Gig Economy (OUP 2018) by Jeremias Prassl is an engaging, illustrative, and thought-provoking book. The book argues that gig-economy platforms such as Uber, Amazon’s Mechanical Turk (MTurk), Deliveroo, or TaskRabbit ‘present themselves as marketplaces, even though, in reality they often act like traditional employers’Tue, 13 Nov 2018 11:00:00 +0000Václav Janeček19971 at https://www.law.ox.ac.ukHumans as a Service: The Promise and Perils of Work in the Gig Economy (OUP 2018) by Jeremias Prassl is an engaging, illustrative, and thought-provoking book. The book argues that gig-economy platforms such as Uber, Amazon’s Mechanical Turk (MTurk), Deliveroo, or TaskRabbit ‘present themselves as marketplaces, even though, in reality they often act like traditional employers’ (ibid 5). Unveiling this doublespeak of the gig economy in which the platforms ‘operat[e] under the mantle of a “sharing economy” [but in fact focus] … on commercial labour intermediation’ (ibid 7) is one of the main targets of the book, because, as Prassl argues, the doublespeak is ‘designed to keep customers and workers interested, and regulators at bay’ (ibid 85).

According to the book, one of the issues brought about by the gig economy is a seemingly new class of workers and employers who do not easily fit the traditional concepts known from employment law. The book asks whether the gig economy micro-entrepreneurs, ie the Uber drivers, Deliveroo couriers, or Amazon MTurk workers, should be characterised as employees and the online intermediary platforms as their employers. This issue is not new and has been already discussed in courts, by the lawmakers, in the news, as well as in the academic literature, as we can see from the wide range of international sources on which Prassl’s book relies. Instead, the main original contribution of Humans as a Service rests in the following three claims that the book advances in response to the question.

Three original claims

The first and, according to the author, ‘[t]he central claim of this book is that most gig-economy work falls within the scope of employment law’ (ibid 140). This claim is supported throughout the book by a number of practical examples regarding the functioning of the gig economy, most often by secondary empirical data regarding operation of Uber in the UK and US. This intriguing collection of real-world cases gives a vivid picture of the underlying processes in the gig economy. Besides, Prassl’s book guides the reader through an engaging and convincing historical journey to show that ‘platforms have latched onto our deserved support for innovation—and sold us a century old model as a radically new way of organising work’ (ibid 85). The most fascinating data concern the lock-in mechanisms which the platforms use to gain and retain a substantial (or dominant) market share, hence leaving little freedom to the gig workers as to whether they will sign out from the app, or just turn it off for a moment.

Despite the proclaimed ambition to describe ‘the reality of work in the on-demand economy’ (ibid 50), however, a number of important empirical claims in the book would gain in persuasiveness with some more backing from empirical evidence. For example, the book does not substantiate the claims that workers ‘suffer precisely because supply is designed far to outstrip demand’ (ibid 21), or that ‘cars [are] roaming the streets whilst looking for the next passenger’, which has environmental impacts (ibid 21). Other important claims seem a bit overstated. For instance, while the book shows that some workers are ‘tightly controlled by their platforms, with low pay, long hours, and questionable working standards’ (ibid 68), it is not clear how the same evidence proves that these ‘working standards … are increasingly the norm, rather than an exception’ (ibid 68). Besides, the book’s overall argument would have been stronger had the occasional overgeneralised interpretations of data also been avoided. For example, a statement that ‘only a little over 50 per cent of registered [Uber] drivers are still active a year after they first signed up’ (ibid 68) only applies to US Uber drivers who made their first trip between January and June 2013, ie more than five years ago, as one can see in the original source of these data. Still, the book’s claim that ‘the reality of work in the on-demand economy can be so disheartening that workers move on to different platforms’ (ibid 68) relies on this interpretation. As a result, it is sometimes unclear about what regions or markets, for which period, and about what domains of the gig economy the individual claims and hence also the book’s conclusions are made.

The second and pehaps also the most important original contribution is that the book convincingly argues against the ‘all or nothing’ approach to the employee status of workers in the gig economy (ibid 101). The dilemma, as it is often seen, is that the gig workers are either employees providing a controlled service or independent contractors (ibid 44). This apparently leads to conclusions that the gig workers who do not easily fit the concept of an employee must be seen as independent entrepreneurs, or vice versa.

The book nicely shows, however, that the reality is more complicated and that we need a case-by-case approach when determining the status of each worker in the gig economy. Importantly, in this regard, the book argues that if we focus on the entire customer-worker-platform relationship we can often find all the main functional aspects of the traditional employment. Thus, although it might be hard to present the gig workers as employees in the traditional structure of the two-party employment contract, the book makes a strong case for adapting employment law to this new structure and for granting gig workers employment rights and legal protection. An important issue that the book leaves us with some uncertainty about is against whom these rights could be granted. On the one hand, the book suggests that the gig-work platforms should bear the employer’s responsibilities, but, on the other hand, it acknowledges that these platforms do not always concentrate all the functions necessary to characterise them as employers.

Thirdly, after showing that there is nothing new about the business model behind the gig economy—the model still relies on what we traditionally characterise as labour—and after showing that employment law (with further advancements) could apply to the gig economy, the book puts forth a prescriptive claim that employment law should regulate gig-work, because it will help level the playing field ‘to the potential benefit of all involved’ (ibid 140). According to the book, employment law should regulate work in the gig economy because ‘[c]onsumers, taxpayers, and even platforms themselves will ultimately benefit from a marketplace in which everybody plays by the rules’ (ibid 117). Besides, employment law ‘appears to be much the most efficient way of ensuring that employers internalize the costs of their business activities’ (ibid 131).

Although it is clear that employment law is well suited to allocate fairly the true costs of such intermediated labour, the book does not explore any variant regulatory instruments to support the claim about employment law’s supreme efficiency. The book promises to show us benefits that a levelled playing field will bring, but then discusses the costs and negative effects that it could help avoid, which is a different issue. Moreover, the book acknowledges the importance of other regulatory areas of law—especially consumer law and tax law (ibid 131), but not, surprisingly, competition law—that could help solve those issues regardless of whether we characterise the gig-work as employment or not. As a result, it remains unclear why we should buy into employment regulation at large, rather than addressing the individual issues brought about by the gig economy.

Why humans as a service?

The title of the book is inspired by the Amazon CEO’s talk from 2006, in which Jeff Bezos discussed the introduction of MTurk and its impact on cloud computing: ‘You’ve heard of software as a service—Well, this is basically people as a service’, he said (at 11:40). The powerful idea behind the MTurk was that in addition to a cloud of software services that the users may utilise, you could tap into a cloud of people who would provide services to supplement tasks which the computer software cannot perform as efficiently as humans. Back in 2006, for example, these human-reliant services included simple and quick yet intelligence-heavy tasks such as visual recognition. Today, these human intelligence tasks range from writing a new line of code to filling in a survey, from reviewing a new app to editing a translation. The model behind remains the same though—as a consumer you still use the online app which intermediates the demanded service, be it a service performed by a computer software or supplemented by humans.

If we take the book’s title seriously and not as mere doublespeak, perhaps we should think similarly about the gig economy at large. For example, we should think about Uber price-making algorithms as one layer and Uber drivers as another layer in the cloud of Uber’s services. This analogy, however, does not invite so clearly questions regarding the employment status of the workers in the cloud. If we pursue the analogy, it is evident that the workers could be qualified both as employed by the cloud service provider (a platform) and as hired by the end user as independent contractors. Accordingly, the ‘all or nothing’ approach does not play any significant role in this cloud model of gig-work.

For some reason, however, the book pays little attention to this line of thought and does not elaborate on the analogy in its title. That is surprising because Human as a Service (HuaaS) is a concept long employed in cloud computing on which the new platforms largely rely. To the extent that the book wanted to discuss regulation of these platforms, its arguments could have explored the analogy and perhaps point out the dangerous commodification of humans in the cloud. In the absence of such discussion, it seems unlikely that the book will bridge the divide between the language of technology and the reality of the business models that underline it.

Final remarks

Humans as a Service is a great starting point to anyone interested in employment law issues surrounding the gig economy. It provides an authoritative overview of some of the most topical problems and illustrates them by a number of exciting examples. Although the book does not address any specific jurisdiction or segment of the gig economy, it usefully instructs the reader on how to make better sense of the business models, algorithmic governance, and network effects underpinning much of this new domain of economic activity.

Of course, a book of this format cannot provide an exhaustive description of the reality of work in the gig economy at large. Hence, to see whether ‘the real prize for corporate doublespeak has been in selling platform-based work as innovative entrepreneurship’ (ibid 40) and, therefore, whether employment law should regulate this type of work, our labour judges and administrators will need thoroughly to examine individual cases, as the book convincingly argues elsewhere (ibid 100).

Overall, there is a lot of food for thought in this book and its unusually engaging style makes it even more tasteful. Humans as a Service is an important contribution to debates about humans’ labour in the digital economy and invokes a more structured thinking about these issues.

Václav Janeček is reading for a DPhil in Law at the University of Oxford.

]]>The choice between judicial and administrative sanctioned procedures to manage liquidation of banks: A transatlantic perspectivehttps://www.law.ox.ac.uk/business-law-blog/blog/2018/11/choice-between-judicial-and-administrative-sanctioned-procedures
Following the great financial crisis in 2008, preventing future bail-outs for large, systemically important banks while minimizing the repercussions of bank insolvencies on the stability of the financial system has become a key policy objective for international standard-setters as well as national and supranational policy-makers and regulators. The focus has been not just on the prevention of systemic contagion andTue, 13 Nov 2018 05:30:00 +0000Jens-Hinrich Binder, Mike Krimminger, Maria Nieto, Dalvinder Singh19931 at https://www.law.ox.ac.ukFollowing the great financial crisis in 2008, preventing future bail-outs for large, systemically important banks while minimizing the repercussions of bank insolvencies on the stability of the financial system has become a key policy objective for international standard-setters as well as national and supranational policy-makers and regulators. The focus has been not just on the prevention of systemic contagion and the protection of insured depositors and client assets and monies, but also on minimizing the public and private costs of containing bank crises. Given the global nature of the financial crisis and the cross-border economic implications, it is hardly surprising that initiatives to accomplish these objectives have been global in scope, but their implementation has inevitably been guided by the legal frameworks in the respective jurisdictions.

The European Union (EU) and United States (US) frameworks establish a set of tools to ‘resolve’ a failing bank without recourse to formal court-supervised insolvency proceedings, thereby creating a clear policy demarcation between resolution and insolvency. Within this framework, which draws from the Financial Stability Board (FSB) approach, ‘resolution’ may be understood as functional alternative to court-supervised traditional insolvency procedures such as liquidation. In the EU it has become the preferred approach in bank resolution plans of national resolution authorities, partly reflecting the lack of credibility and feasibility of the national bank liquidation processes.

In a recent paper, entitled ‘The choice between judicial and administrative sanctioned procedures to manage liquidation of banks: A transatlantic perspective’ [forthcoming in: Capital Markets Law Review], we analyze the EU and US approaches to bank insolvency and reflect on the effectiveness of insolvency procedures for banks (and their holding companies in the United States), as well as on the advantages and disadvantages of a dual system that includes an administrative authority and court-supervised procedures. The paper also analyses the need for coordination through harmonization in the EU, especially in the euro area, and the need for enhanced substantive coordination with a view to developing the European Deposit Insurance System (EDIS).

We start from the insight that the recent statutory reforms established a regime that should impose broadly similar economic consequences for bank owners, management, and major stakeholders while avoiding potential detrimental knock-on effects that could result from the application of the traditional procedures under insolvency law. In this context, the principle that losses in bank debt should be borne primarily by bank owners and investors became paramount, while the ranking of claims in this context broadly, although not fully, follows the principles of general insolvency law, and creditors should receive no less because of ‘resolution’ than they would have received in a traditional insolvency liquidation of the relevant institution.

At the same time, the introduction of resolution tools tailored to the needs of insolvencies of large, complex, internationally active banks and banking groups has not removed the existing approaches and procedures for dealing with institutions of ‘no public interest’. Indeed, within Europe the Bank Recovery and Resolution Directive (BRRD) expressly provides that where a failing bank’s outright liquidation under general insolvency laws would not give rise to concerns regarding public policy interests (the ‘public interest’ test), ‘resolution’ under the BRRD should not be allowed and the relevant bank should be liquidated in ordinary insolvency (bankruptcy) proceedings instead.

Against this backdrop, we then examine, adopting a Trans-Atlantic perspective for that purpose, the reasons for and potential implications of divergences in national approaches to insolvency management for banks below the ‘public interest’ threshold. In the EU, different national frameworks have been developed to deal with bank liquidation, and have been refined over time in response to the individual characteristics of the respective market structures, administrative (or court) infrastructures, and specific lessons learnt during individual incidents of bank failures. Consequently, although each system will usually be the product of a more or less path-dependent evolution, which may or may not entail the preservation of inefficient procedural or substantive solutions, the diversity of arrangements as such should be expected. In fact, the diversity of banking systems and administrative law traditions seems to explain, at least partly, the diversity of bank liquidation frameworks and the differences in their efficiency measured in terms of loss rates of the respective Deposit Guarantee Schemes.

We find that the diversity of existing approaches to ‘no public interest’ insolvencies creates problems within the euro area and future participating members of the Banking Union for three main reasons:

· First, increasing integration of the European banking and financial markets almost inevitably means that cross-border implications of a liquidation can, and often will, arise even in cases involving small or medium-sized banks (e.g. runs on similar debt types in banks in other countries or simply debt-spread variations due to contagion). In this context, differences in residual national regimes could lead, inter alia, to differences in the treatment of creditors (secured or unsecured and even within each class, e.g. intragroup liabilities) and thus to differences in terms of economic outcomes, as well as to legal uncertainty, all of which contradict the very objective of an integrated common market for financial services. Furthermore, in the euro area the credibility of the euro relies on ensuring equal protection of insured depositors throughout the area, even in crisis-struck countries.

· Secondly, and more specifically, the efficiency of national regimes in dealing with bank insolvency will have an impact on the financial situation of national DGSs on which insured depositors have a claim, creating differences in liquidity and loss coverage needs of national DGSs (e.g. lengthy bankruptcy procedures may result in dramatic deterioration of the banks’ asset recovery values). The proposed pan-European deposit insurance scheme (EDIS), which by definition can arguably be seen as a burden-sharing arrangement based on commonly accepted principles, is hardly conceivable in an environment where differences in national bankruptcy administration and in the substantive treatment of claims in national bankruptcy laws result in substantial differences in terms of the economic value of a given claim against an ailing institution.

· Thirdly, the inefficiency of bank liquidation procedures to wind up the residual bank within a reasonable timeframe may lead to a decision by the resolution authority not to use the bridge bank resolution tool as a part of a reorganization procedure and avoid a situation of creating a residual bank that would be put in to winding up proceedings. Hence the effectiveness of the systemic banks’ resolution procedure could depend on the harmonization of at least certain substantive aspects of banks’ liquidation to the highest standards.

The views expressed in this Blog and in the referenced paper represent the authors’ views and not necessarily those of Bank of Spain or the Eurosystem, or the policies or views of Cleary Gottlieb or any of its partners.